New Products, Little Buzz
Is the thrill gone for Apple? Apple product announcements used to generate both investor and user excitement in the days prior to the unveiling, followed by a post-announcement drop in the stock. Excluding the original iPhone announcement in 2007, typical iPhone introductions created around a 5% stock increase during the prior month based on anticipation, with a drop on the announcement day averaging 0.8%. Last week's announcements broke that pattern in a negative way.
For weeks heading into its latest product presentation, which occurred Wednesday at the packed Bill Graham Auditorium in San Francisco, Apple stock has been on a slide, down 18% from its peak in mid-July. That slide, combined with lesser expectations on the product release, left hope that there would be an upward bounce in the stock after the announcement. Unfortunately, the post-announcement stock drop held as Apple closed down 1.9%.
Investors were concerned because nothing groundbreaking was unveiled. iPhone enhancements were modest, as the new 6S gets a megapixel boost for both front and rear cameras, a faster chip, and a "3D touch" pressure-sensitive touch screen that allows access to different menus based on the pressure applied. It remains to be seen if that's enough to entice consumers to upgrade from the iPhone 6, or if iPhone 5/5S users will skip straight to the 6S instead of opting for the now cheaper 6.
Increments, Not Innovation
The ardent Apple faithful were impressed with the variety of improvements, as they are with any Apple release. Others, however, expressed disappointment at the lack of true innovation in any of the announcements and the drift toward features that have already been incorporated by others. Playing catch-up is not Apple's strong suit.
What else was announced at the big event?
As the show was dubbed “Hey Siri”, it’s not surprising that Apple TV now includes Siri, the voice-operated assistant, in the control system. Viewers can use a voice-operated system to call up their favorite programs with sophisticated searching capabilities. It's a new feature for Apple, but not innovative. The new remote control and interesting new apps are positive additions, but it would be a stretch to call any of them a game changer.
Apple Watch now has a new operating system, new apps including Facebook Messenger, and new band choices, among other changes — but again, the true innovation was in the previous introduction of the Apple Watch itself.
In short, this round of announcements was heavy on incremental improvements and short on innovation.
It's Not Steve Jobs' Apple Anymore
Steve Jobs famously said, "Who wants a stylus?" at the original iPhone introduction and that any device maker who introduces a stylus had "blown it." The appearance of the Apple Pencil to correspond with the larger iPad drives home the point that Jobs is no longer with us and that Apple has moved on.
Time will tell whether Jobs was right. While the Apple Pencil reportedly has impressive tracking and feel capabilities, it constitutes a $100 accessory being pitched to an audience that's skeptical, if not outright hostile, to the heretical concept.
As for the new iPad, the iPad Pro, its larger 12.9-inch size and optional keyboard is novel for an iPad but brings it closer to the features of Microsoft's Surface. Apple appears to be targeting businesses and positioning the iPad Pro as more of a PC replacement, but simply offering a package of tablet, stylus, and keyboard doesn't bring an overly compelling case to Apple's tablets.
It's unfair to equate an introduction of a product that Steve Jobs would likely never have introduced and the death of groundbreaking innovation at Apple — but it does make one wonder where the next product innovation path lies.
Apple Tweaks the Providers
One of the more interesting announcement involved sales strategy. Apple is intruding into the service provider's strategy and offering to sell their phones directly to consumers at full retail price spread out in installments. These phones are unlocked and remain so, allowing you to switch easily between service providers. As a further incentive, Apple is offering upgrades to the newest smartphone model at the one-year mark.
Service providers count on phone deals to retain loyalty, especially with the shrinking availability of traditional two-year contracts with subsidized phones. The providers must not be pleased, but what sort of retaliatory options do they have against Apple?
Since service providers have moved away from subsidizing phones, consumers are beginning to realize how much their phones actually cost. As a result, they are more likely to put off upgrades regardless of whether upgrades are through the providers or direct with Apple. Apple's strategy is simultaneously to entice consumers to upgrade more often while keeping more of the proceeds. That puts even more pressure on a steady stream of significant improvements and innovative product designs. We'll see if Apple is up to the task.
Clearly, Apple can't maintain the stratospheric growth they have shown in the past — at a certain point, it becomes mathematically impossible. Therefore, investors are questioning whether Apple is truly settling into a maturity phase, with solid but unspectacular growth, or just stuck in a less innovative cycle. Steven Milunovich, an analyst with UBS, is in the former camp. He noted that Apple is "now mainstream and not the upstart" and that the previous rapid growth is being replaced by "annuity-like revenue streams."
Investors seem to be hedging bets at this point. (NOTE: Writer is long on Apple.) They aren’t willing to give up on Apple yet as a major growth vehicle, but aren't convinced that Apple Watch, Apple Pay, and Apple TV are the new growth engines, either. The upcoming holiday shopping season should give us a pretty good indication of the acceptance of the Apple Watch and how many iPhone users are ready to upgrade.
Even with an arguably disappointing set of product announcements, Apple still brings in enormous revenue, with a fiscal third quarter revenue of $49.6 billion, and its P/E ratio is relatively healthy in the 12-13 range, especially for a tech stock. It's never a good idea to count Apple completely out with respect to groundbreaking future innovations — and even if they are beginning to settle into the path of a mature company with solid if not spectacular "annuity-like" growth, is that such a bad thing? Every portfolio needs a dependable stock or two.